How SmartBooks Improved Our Labor Value Multiple by 33%
Hi, everybody. I’m Jeff Provost, Chief Operating Officer with SmartBooks. I’m here today to talk to you about the Labor Value Multiple or LVM, one of our favorite metrics at SmartBooks. As a quick recap, LVM is simply a measure of profitability where you take the revenue for a client and divide that by the total cost that it takes to deliver service for that client. It doesn’t include things like overhead, and sales and marketing cost, and things like that. It’s simply the actual cost of delivering service for that particular client.
Labor Value Multiple by Client: Focus on Trends
What we did at SmartBooks is we actually went back and we calculated LVM for all of our clients over a six month period. Now, it’s important to look at trends, because in any given month things can happen, and the cost can fluctuate up or down, and things like that. So, it’s important to look at trends. So, we calculated LVM for a six month period, and then we identified the 20 clients that actually consistently had the lowest LVM. We dug deeper to identify what was driving that low LVM. Now, there’s really only two factors that can impact LVM, price and cost. So, we actually looked at both of those things.
Labor Value Multiple Factor One: Reduce Costs
On the cost front we identified opportunities to improve the efficient delivery of service by leveraging maybe a lower cost resource to do the same type of service at the same quality levels, but you just save a little bit of money on that front. We also looked at employing better technology, and process changes, and things like that, just to work more efficiently. There was a handful of clients where we were able to just reduce the cost without changing the scope of service, and the pricing, and things like that to get closer to what our LVM targets were.
Labor Value Multiple Factor Two: Right-Size Pricing
The other thing that we looked at was pricing. Through this exercise we identified a deficiency in our own internal processes where we didn’t do a good job over the course of time of increasing the price as the scope of service changed. What we identified was that there were a number of clients where their scope of service had dramatically changed. So, by putting together kind of the data and the details here, we’re able to go back to those clients and demonstrate how significantly it’s changed over time and actually justify increasing the price.
Sometimes, It’s Okay to Say Goodbye
The other thing that we ended up with as part of this LVM study is we also identified a number of clients where they really had outgrown us, and we were no longer the best solution for them to be able to deliver the service that they needed at the quality that they needed at a cost that made sense for both of us. So, in a couple of instances we actually chose to part ways and kind of put together a transition plan to transition those clients out to a better solution for them. Those are obviously really hard decisions when you have to do things like that, but LVM was kind of that indicator light that gave us something to look at to make the best decisions for our clients and for us in terms of cost, and price, and so on, and so forth.
Labor Value Multiple Exercise Results
So, the results of this have been actually incredible. Overall, through addressing the lowest 20 LVM clients, we’ve seen our overall company LVM improve by 33%. We’ve seen a 1.5% increase in contribution margin, which is going to flow right through to the bottom line and impact our profitability. All the while we’ve also parted ways with about 3% of our clients that, again, just weren’t the right fit for whatever reason. So, this is just becoming core to what we do, and it’s really great for the team to have goals and targets to shoot for. Everyone’s kind of marching in the same direction in terms of knowing where we need to be from a profitability standpoint and giving us a common language to talk about. That’s all based on LVM.
I believe that this is something that’s usable for any type of services business. If you are interested in it for your business, please reach out to us. We’d love to talk with you and see how we might be able to put LVM into practice in your world.